Federal Court of Australia

Australian Securities and Investments Commission v Bit Trade Pty Ltd (No 2) [2024] FCA 1422

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 1317G(1) of the Corporations Act 2001 (Cth) (“the Act”), within 60 days the defendant pay to the Commonwealth a pecuniary penalty in the amount of $8,000,000 in respect of the defendant’s contraventions of s 994B(2) of the Act the subject of the declaration made on 30 August 2024.

2.    The defendant pay the plaintiff’s costs of the proceeding.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

NICHOLAS J:

INTRODUCTION

1    In this proceeding the plaintiff (“ASIC”) alleged that the defendant (“Bit Trade”) contravened s 994B(2) of the design and distribution obligations (“DDO”) in Part 7.8A of the Corporations Act 2001 (Cth) (“the Act”) by issuing, granting or making available a financial product known as “Margin Extension” (“the Product”) used by Bit Trade customers to purchase certain digital assets (including cryptoassets) on the digital asset exchange known as “Kraken” operated by Payward Inc (“Payward”). The relevant provisions of the DDO regime came into force on 5 October 2021.

2    On 23 August 2024 I published reasons for judgment finding Bit Trade liable: Australian Securities and Investments Commission v Bit Trade Pty Ltd [2024] FCA 953 (“J”). On 30 August 2024 I made a declaration in terms agreed between ASIC and Bit Trade:

The defendant contravened s 994B(2) of the Corporations Act 2001 (Cth) each time it first issued, granted or made available the Product to a person on or after 5 October 2021 without first making a target market determination.

3    The question to be determined is what pecuniary penalty Bit Trade should be ordered to pay in respect of its contraventions. ASIC says that $20 million is an appropriate penalty. Bit Trade accepts that a pecuniary penalty should be imposed, but says that it should not exceed $4 million.

4    The DDO regime is intended to help consumers obtain appropriate financial products by requiring issuers and distributors to take a “customer-centric approach” to the design, marketing and distribution of financial products: Revised Explanatory Memorandum to the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2019 (Cth) at para 1.5. Paragraphs 1.2-1.7 of the Revised Explanatory Memorandum relevantly state:

Context of amendments

1.2    The Corporations Act relies heavily on disclosure to assist consumers [to] understand and select appropriate financial products. However, disclosure can be ineffective for a number of reasons, including consumer disengagement, complexity of documents and products, behavioural biases, misaligned interests and low financial literacy. The availability of financial advice may not be sufficient to overcome these issues. A consumer may not seek financial advice or may receive poor-quality advice.

1.3    The Financial System Inquiry recognised these shortcomings of the existing disclosure regime. In response, it recommended the introduction of a targeted and principles-based product design and distribution obligation …

…

1.5    These obligations are designed to assist consumers to obtain appropriate financial products by requiring issuers and distributors to have a customer-centric approach to designing, marketing and distributing financial products.

…

Summary of new law

1.7    Schedule 1 to the Bill amends the Corporations Act to introduce design and distribution obligations in relation to financial products. These new obligations improve consumer outcomes by ensuring that financial services providers have a customer-centric approach to making initial offerings of products to consumers.

(Footnotes omitted)

5    The DDO regime requires the issuer of a relevant financial product to make an appropriate target market determination (“TMD”) which must (inter alia) describe the class of retail clients within the target market for the product and specify any conditions and restrictions on the distribution of the product to retail clients. The issuer is also required to take reasonable steps to ensure that the distribution of the product is consistent with the TMD and to notify ASIC of any significant dealings in the product that are not consistent with the TMD.

FACTUAL BACKGROUND

6    The evidence before me includes the Agreed Statement of Facts (“ASF”) dated 1 July 2024 that was tendered at the liability hearing. Also in evidence is an affidavit Ms Tegan Gosling, a Senior Manager in the Enforcement and Compliance team of ASIC, and two affidavits made by Mr Jonathon Miller. Mr Miller was cross-examined.

7    Mr Miller is a co-founder of Bit Trade and its Managing Director. He holds a Bachelor of Arts and a Bachelor of Commerce from the University of Sydney. He co-founded Bit Trade in or around April 2013, which is when it commenced to operate a digital currency exchange. He has been the Managing Director of Bit Trade since 2017.

8    The documentary evidence includes correspondence exchanged between ASIC and Bit Trade. The evidence also includes a copy of a compliance assessment prepared in or around February 2021 by Ms Sonia Mayenco, who was at that time Kraken’s Regional Compliance Officer for Australia, and copies of letters of legal advice provided by the law firm known as “The Fold Legal Pty Ltd” (“Fold”) dated 25 March 2022 and 29 July 2022. The second letter of advice is of particular significance because it is in that letter that Fold provided advice specifically directed to the question whether Bit Trade was required to make a TMD in respect of the Product.

9    Bit Trade was acquired by Payward, a company registered in Delaware, United States of America, in January 2020. Payward operated the Kraken platform outside Australia before it acquired Bit Trade. As at January 2020, Payward’s services included a margin extension product which was available to eligible customers, including customers in Australia, under which they could receive extensions of digital assets or legal tender to use to make spot purchases and sales of digital assets. At that time Bit Trade did not offer an equivalent product.

10    Following the acquisition of Bit Trade by Payward in January 2020, Bit Trade’s clients were migrated to the Kraken platform. That process was finalised in around July 2020. Under the relevant Terms of Service (“TOS”), Bit Trade was the designated counterparty to Australian customers (with effect from 13 April 2021). Bit Trade provided Australian customers with access to the Kraken platform and the Product.

11    Ms Mayenco’s compliance assessment dated February 2021 is in the form of a powerpoint presentation. Issues considered in the assessment include whether various products were financial products and whether Bit Trade was required to conduct various activities under an Australian Financial Services Licence, the scope of various exemptions under s 911A of the Act, and whether Bit Trade was operating a managed investment scheme.

12    The evidence showed that Ms Mayenco was based in Singapore and that she was not a qualified Australian lawyer. The evidence did not indicate whether she was assisted in preparing the assessment by an Australian lawyer, though judging by the content of the document I think that it is likely that she was. The assessment does not refer to the DDO regime which had yet to come into force. Senior Counsel for Bit Trade, Mr Arnott SC, submitted that Ms Mayenco’s assessment reflected a detailed and careful attempt to understand the regulatory regime as it then stood. I do not think the evidence provides the necessary foundation for that submission, though ASIC did not submit that the assessment was anything less than a good faith attempt to understand a complex regulatory regime which did not at that time include the relevant DDO provisions. There is no evidence to indicate that any further compliance assessment was undertaken by Bit Trade in the lead up to the DDO regime taking effect.

13    On 8 March 2022, ASIC wrote to Bit Trade seeking information about the Product. Those inquiries focused on whether it was a “Contract for Difference” (“CFD”). Bit Trade responded later that month by letter which attached a copy of the Fold advice dated 25 March 2022. That advice concluded that the Product was not regulated as a derivative under the Act and, for that reason, could not be a CFD. The advice also concluded that the Product was a “credit facility” and was not a “financial product” because it was within the exclusion in s 765A(1)(h) of the Act.

14    On 20 June 2022 ASIC again wrote to Bit Trade referring to the Fold advice and the acknowledgement that the Product was a “credit facility”. ASIC stated that a credit facility is a financial product for the purposes of the Australian Securities and Investments Commission Act 2001 (Cth) and falls within the DDO regime under Part 7.8A of the Act. Further, ASIC stated:

While [regulation] 7.8A.20 of the [Corporations] Regulations 2001 excludes certain financial products, including certain credit facilities, from the DDOs, none of these exclusions appear to apply to the Product based on the advice provided in the Legal Opinion.

15    The liability hearing focused on the scope of the exemption created by reg 7.8A.20, insofar as it relates to “credit facilities”. The Product was found to be outside the scope of that exemption (J [46]).

16    Bit Trade responded to ASIC’s letter by email on 29 July 2022, attaching a copy of Fold’s advice of the same date. The 29 July 2022 letter of advice (“the Fold Advice”) included a “Summary of Opinion” which was as follows:

SUMMARY OF OPINION

In our view, [Bit Trade] is not required to prepare a TMD for the Product because the DDO regime does not apply to credit facilities used for investment purposes (i.e., credit facilities used to buy or sell crypto assets). On this basis, we confirm that [Bit Trade] is not required to comply with the DDO regime in Part 7.8A of the Act or provide a TMD for the product under section 994B(5) and (8) of the Act …

17    According to the Fold Advice, application of the DDO regime depended on whether Bit Trade was engaged in “retail product distribution conduct”. The advice includes an acknowledgment that “the answer to this question is not straightforward … because the DDO regime does not readily or clearly apply to credit facilities used for investment purposes”.

18    The conclusion that the DDO regime does not apply to credit facilities used for investment purposes was justified in the Fold Advice on a number of different grounds, including that “the application of statutory interpretation principles suggests that the application of the test [for retail product distribution conduct] cannot possibly be what was intended” and that “there is no clear intent on the part of the Parliament … that the DDO regime applies to credit facilities used for investment purposes”. The advice makes no detailed reference to reg 7.8A.20 of the Corporations Regulations 2001 (Cth).

19    Bit Trade acted on the Fold Advice, taking the position that the DDO regime did not apply to the Product because the credit provided was for investment purposes. It continued to make the Product available without a TMD.

20    ASIC issued a notice to Bit Trade on 10 March 2023 seeking assistance in relation to the investigation of suspected contraventions of ss 994B and 994D of the Act, in connection with Bit Trade margin trading products. On 13 July 2023 ASIC issued a notice of examination to Mr Miller. Further notices were issued to Bit Trade on 11 August 2023.

21    On 10 August 2023, a solicitor (who was a co-signatory to the Fold Advice), wrote to ASIC stating:

While Bit Trade remains of the view, as previously stated, that the law does not require a TMD to be produced for credit for investment purposes, Bit Trade is committed to transparency and good consumer outcomes. As such, Bit Trade is considering drafting a legally compliant TMD to be made publicly available for the margin product, on a voluntary basis. While Bit Trade has not yet adopted a firm position on this, it has considered what the target market might look like in the event it takes this path. At this stage we consider that the target market should include some (but not all) consumers who might meet a retail client definition. This is on the basis that the margin product may be appropriate for, and offer benefits to, some retail clients trading cryptocurrency, whilst also being designed to limit any losses to the collateral posted.

…

In order for Bit Trade to consider proceeding in accordance with the proposal outlined above, we invite and welcome ASIC to provide any feedback it may have, by way of email, to us on or before Thursday 24 August 2023.

(Emphasis added)

22    ASIC responded on 14 August 2023. It stated that because Bit Trade maintained that the DDO regime did not apply to the Product, it was not clear what purpose would be served by preparation of a TMD on a voluntary basis. It noted that it was the responsibility of Bit Trade to determine the TMD for the Product and that ASIC did not provide feedback on individual TMDs. It referred Bit Trade to publicly available regulatory guidance on the topic and reserved its rights “in relation to Bit Trade’s on-going failure to prepare a TMD and the appropriateness of any TMD that Bit Trade prepares for the margin product.”

23    This proceeding was commenced by ASIC on 20 September 2023. Mr Miller’s evidence indicates that Bit Trade began preparing a TMD for the product in February 2024 against the possibility that it would be unsuccessful in its defence of the proceeding. After the liability judgment was delivered, Bit Trade made various changes to its TOS and the Kraken platform so that extensions of fiat currency are no longer available to retail clients.

24    At no stage during this proceeding did Bit Trade seek to support the view that it did not engage in “retail product distribution conduct”. Its position is understandable when regard is had to the definition of that expression in s 994A and the meaning given to the term “retail client” by ss 761G and 761GA of the Act.

THE RELEVANT LAW

The relevant principles

25    There was no dispute between the parties as to the principles to be applied in determining an appropriate pecuniary penalty. I referred to the relevant principles in my judgment in Australian Competition and Consumer Commission v Grays Ecommerce Group Limited [2024] FCA 771. That was a case in which I was asked to order a penalty in an amount agreed by the parties. In the context of considering what was an appropriate penalty in that case I said at [20]-[23]:

[20]    In determining what is an “appropriate” penalty in a civil penalty case, the primary objective is deterrence: see Australian Building and Construction Commissioner v Pattinson (2022) 274 CLR 450 (“Pattinson”) at [9], [15], [40]-[41] (Kiefel CJ, Gageler, Keane, Gordon, Steward and Gleeson JJ). The relevant deterrence is deterrence of contraventions “of a like kind” to those found by the Court by the contravenor (specific deterrence) and by others (general deterrence): Pattinson at [10]; see also Australian Competition and Consumer Commission v BlueScope Steel Ltd (No 6) [2023] FCA 1029 at [25].

[21]    In Pattinson the majority referred at [40] with approval to the following passage in the judgment of Burchett and Kiefel JJ in NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 at 293:

    [I]nsistence upon the deterrent quality of a penalty should be balanced by insistence that it “not be so high as to be oppressive”. Plainly, if deterrence is the object, the penalty should not be greater than is necessary to achieve this object; severity beyond that would be oppression.

    Whether a penalty is “oppressive” in the relevant sense turns on whether it exceeds what is necessary to achieve specific and general deterrence.

[22]    In Pattinson, the majority explained that the maximum penalty is but one “yardstick” to be applied and must be treated “as one of a number of relevant factors” to be considered: see [53]-[54] citing the Full Court of the Federal Court’s reasoning in Australian Competition and Consumer Commission v Reckitt Benckiser (Australia) Pty Ltd (2016) 340 ALR 25 at [155]-[156]. The maximum penalty “does not constrain the exercise of discretion … beyond requiring “some reasonable relationship between the theoretical maximum and the final penalty imposed” … [which] may be established by reference to the circumstances of the contravenor as well as by the circumstances of the conduct involved in the contravention”: Pattinson at [55].

[23]    In circumstances where there are a large number of contraventions, Beach J noted in Australian Competition and Consumer Commission v Hillside (Australia New Media) Pty Ltd trading as Bet365 (No 2) [2016] FCA 698 at [19] that “it is an arid exercise to engage in a mere arithmetical calculation multiplying the maximum penalty by the number of contraventions even if one could theoretically quantify that latter number”. In Australian Competition and Consumer Commission v Google LLC (No 4) [2022] FCA 942 (“Google”) at [38], Thawley J referred to the totality principle as a tool that may be useful “in determining whether a penalty strikes a reasonable balance between deterrence and oppressive severity in circumstances where there is a multiplicity of offences”. His Honour said at [36]:

    The totality principle, as applicable in the civil penalty context … requires that the total penalty imposed on a person found to have committed multiple contraventions must bear a proper relationship to the overall conduct involved in all of the contraventions after having regard to all of the relevant circumstances and the object for which the penalty is imposed, namely deterrence.

26    The totality principle requires the Court to review the aggregate penalty to ensure that it is just and appropriate and not out of proportion to the conduct considered as a whole: Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (1997) 145 ALR 36 at 53 per Goldberg J.

Section 1317G

27    The applicable statutory provision in the present case is s 1317G of the Act which relevantly provides:

1317G Pecuniary penalty orders

Court may order person to pay pecuniary penalty

(1)    A Court may order a person to pay to the Commonwealth a pecuniary penalty in relation to the contravention of a civil penalty provision if:

(a)    a declaration of contravention of the civil penalty provision by the person has been made under section 1317E; and

…

(c)    if the contravention is of a financial services civil penalty provision (other than one excluded by subsection (1A)), the contravention:

(i)    materially prejudices the interests of acquirers or disposers of the relevant financial products; or

(ii)    materially prejudices the issuer of the relevant financial products or, if the issuer is a corporation, scheme or fund, the members of that corporation, scheme or fund; or

(iii)    is serious…

…

The order is a pecuniary penalty order.

Maximum pecuniary penalty

(2)    The pecuniary penalty must not exceed the pecuniary penalty applicable to the contravention of the civil penalty provision.

…

Pecuniary penalty applicable to the contravention of a civil penalty provision—by a body corporate

(4)    The pecuniary penalty applicable to the contravention of a civil penalty provision by a body corporate is the greatest of:

(a)    50,000 penalty units; and

(b)    if the Court can determine the benefit derived and detriment avoided because of the contravention—that amount multiplied by 3; and

(c)    either:

(i)    10% of the annual turnover of the body corporate for the 12-month period ending at the end of the month in which the body corporate contravened, or began to contravene, the civil penalty provision; or

(ii)    if the amount worked out under subparagraph (i) is greater than an amount equal to 2.5 million penalty units—2.5 million penalty units.

…

Determining pecuniary penalty

(6)    In determining the pecuniary penalty, the Court must take into account all relevant matters, including:

(a)    the nature and extent of the contravention; and

(b)    the nature and extent of any loss or damage suffered because of the contravention; and

(c)    the circumstances in which the contravention took place; and

(d)    whether the person has previously been found by a court (including a court in foreign country) to have engaged in similar conduct…

…

Relevant matters

28    ASIC submitted, and I accept, that the following matters are relevant when determining an appropriate penalty:

(a)    the extent to which the contravention was the result of deliberate or reckless conduct by the corporation, as opposed to negligence or carelessness;

(b)    the number of contraventions, the length of the period over which the contraventions occurred, and whether the contraventions comprised isolated conduct or were systematic;

(c)    the seniority of officers responsible for the contravention;

(d)    the capacity of the defendant to pay, but only in the sense that whilst the size of a corporation does not of itself justify a higher penalty than might otherwise be imposed, it may be relevant in determining the size of the pecuniary penalty that would operate as an effective specific deterrent;

(e)    the existence within the corporation of compliance systems, including provisions for and evidence of education and internal enforcement of such systems;

(f)    remedial and disciplinary steps taken after the contravention and directed to putting in place a compliance system or improving existing systems and disciplining officers responsible for the contravention;

(g)    whether the directors of the corporation were aware of the relevant facts and, if not, what processes were in place at the time or put in place after the contravention to ensure their awareness of such facts in the future;

(h)    any change in the composition of the board or senior managers since the contravention;

(i)    the degree of the corporation’s cooperation with the regulator, including any admission of an actual or attempted contravention;

(j)    the impact or consequences of the contravention on the market or innocent third parties;

(k)    the extent of any profit or benefit derived as a result of the contravention; and

(l)    whether the corporation has been found to have engaged in similar conduct in the past.

(See Australian Securities and Investments Commission v Commonwealth Bank of Australia [2020] FCA 790 at [68] (Beach J) citing his Honour’s judgment in Australian Securities and Investments Commission v Westpac Banking Corporation (No 3) (2018) 131 ACSR 585 at [49], Australian Building and Construction Commissioner v Pattinson (2022) 274 CLR 450 at [18]-[19] (Kiefel CJ, Gageler, Keane, Gordon, Steward and Gleeson JJ), and Trade Practices Commission v CSR Limited (1991) ATPR ¶ 41-076 at 52,152 – 52,153 (French J)).

29    With regard to (a), ASIC did not contend that Bit Trade’s contraventions were deliberate or reckless. No reliance was placed by either party on (h). As to (l), it is common ground that Bit Trade has not previously been found to have engaged in similar conduct. The focus of the parties’ submission was on the balance of those matters set out above.

CONSIDERATION

30    Bit Trade accepted that its contraventions of s 994B(2) were serious and that the power to order the payment of a pecuniary penalty is enlivened: see s 1317G(1)(c)(iii). The theoretical penalty in this case was said by ASIC to run into billions of dollars (at least 1,160 x $11,100,000). However, ASIC accepted that this figure was not meaningful, and that in this case the appropriateness of a pecuniary penalty should be assessed by reference to other factors. I will now consider each of the matters which were relied on by the parties in support of their contentions as to the appropriate penalty.

Customer’s trading losses

31    Between 5 October 2021 and 11 August 2023, 1,163 Australian customers took up the Product and, in aggregate, paid fees and interest equivalent to US$7,716,345 (approximately A$12 million at the current exchange rate) and suffered trading losses equivalent to US$5,255,198 (approximately A$8.2 million) on assets purchased using the Product. The total number of customers that took up the Product is likely to be greater than 1,163, because Bit Trade continued to offer the Product between 11 August 2023 and 23 August 2024. Of the 1,163 Australian customers who took up the Product, 791 customers obtained margin extensions in fiat currency (“fiat margin”), while 372 obtained margin extensions in cryptocurrency only.

32    Bit Trade submitted that there was no evidence to show that any customer would have behaved differently if a TMD was in place, or that any customer suffered a loss as a result of the contravening conduct. Similarly, it submitted that there was no evidence to show what profit was made by Bit Trade as a result of its contravening conduct.

33    With regard to customer losses, Bit Trade referred to Mr Miller’s evidence indicating that 19% of customers who used the Product to obtain fiat margin during the period 5 October 2021 to 11 August 2023 made money from it. With regard to 81% who did not make money from it, Bit Trade says that those customers’ losses should be disregarded because ASIC has not shown that any customer losses can be attributed to the absence of a TMD. In oral submissions Mr Arnott SC accepted that the figure of US$5,255,198 was a relevant number, but said that there were other factors which pointed to a much lower number for customer losses relevant to the assessment of an appropriate penalty.

34    Bit Trade submitted that even if customer losses were to be taken into account, the Court should also have regard to the fact that a proportion of the margin extensions made available to customers who used the Product were in cryptocurrency, which did not create a debt for the purpose of reg 2B(3)(a) of the Australian Securities and Investments Commission Regulations 2001 (Cth): J [38], [41]. The fact that advances in cryptocurrency did not of themselves require a TMD was said by Bit Trade to be an important consideration in determining an appropriate penalty.

35    Bit Trade also submitted that customer losses were largely explicable by reference to overall volatility in the cryptocurrency market. Bit Trade referred to Mr Miller’s evidence which showed that if customers who executed trades with fiat margin had executed those same trades in the spot market without margin, they would still have incurred aggregate trading losses of US$1,131,497.

36    Bit Trade also submitted that the losses suffered by customers were highly concentrated and that one customer alone accounted for US$3,926,672 or 75% of all trading losses and US$1,033,423 or 30% of trading losses using fiat currency. That customer traded in more than US$480 million in margin during the relevant period across 62,526 trades. It was submitted that this customer was “plainly a large, sophisticated investor, well familiar with the product”. That was also said to be true for the remainder of the 10 customers that recorded the largest loss when using fiat margin, who were said to account for 57% of the aggregate net losses of all 643 customers who recorded net losses.

37    Mr Miller’s evidence indicates that 13 customers who used fiat margin in the relevant period are now “wholesale clients” of Bit Trade. The trading losses attributed to them in Bit Trade’s analysis is US$67,632. Mr Miller also gave evidence that for the 10 customers using fiat margin who had recorded the largest losses, their trading and other account data indicates that they are likely to be sophisticated investors with substantial resources. In particular:

    a number of the customers held institutional accounts, which means they are a corporate entity or a trust;

    all of these customers traded significant volumes on margin over the period, with two customers trading over US$1 billion on margin in the period;

    the customers also traded significant volumes on the spot exchange without using margin, with five customers trading over US$10 million on spot without margin in the period;

    certain customers had extremely high trade counts in the period which, in Mr Miller’s experience, is indicative of using algorithmic or other trading software to support trading strategies;

    a number of the customers also made significant deposits to and/or withdrawals from the platform in the period; and

    customers’ maximum daily balances in the period also provide an indication of their resources. These users had maximum daily balances of several hundreds of thousands of US dollars, and four users had maximum daily balances of over US$1 million.

Of the 10 customers identified by Mr Miller, six were individuals and four held institutional accounts. The trading losses suffered by the six individuals total US$2,947,507 and the four institutional accounts total US$1,461,268.

38    ASIC drew attention to s 761G(9) of the Act which provides:

761G    Meaning of retail client and wholesale client

…

(9)    If:

(a)    it is alleged in a proceeding under this Chapter (not being a prosecution for an offence), or in any other proceeding (not being a prosecution for an offence) in respect of a matter arising under this Chapter, that a particular financial product or financial service was provided to a person as a retail client; and

(b)    the product or the service is one to which subsection (7) applies;

    it is presumed that the product or service was provided to the person as a retail client unless the contrary is established.

(Notes omitted)

The question whether any of the customers were “professional investors” within the meaning of s 761G(7)(d) was not the subject of any evidence or submission.

39    While s 761G creates a presumption that the customers to whom the Product was made available were retail clients, it does not create a presumption that any losses suffered by them were suffered because of Bit Trade’s contravention of the Act.

40    It is doubtful whether investors fully cognizant of the financial risks involved in trading in cryptocurrency using the Product could be said to have suffered their losses because of Bit Trade’s failure to make a TMD in respect of the Product. I therefore accept that in assessing any loss and damage suffered because of Bit Trade’s contravention, it may not be appropriate to include losses suffered by those investors. That said, the vast majority of customers to whom the Product was made available were likely to have been retail clients. Of the clients who used fiat margin during the relevant period (643 clients) about a third of them (225 clients) suffered losses in excess of US$1,000. The evidence does not permit me to say what impact those losses may have had on them, and how many of them would have avoided such losses if Bit Trade had made a TMD. However, the potential for such clients to suffer very substantial financial harm should not be underestimated. The Product enabled them to purchase cryptoassets in an extremely volatile market using fiat margin, including fiat margin denominated in foreign currency. Bit Trade accepts that the Product carried a very high degree of financial risk and could result in the client losing more than they had invested.

Fees and interest paid to Bit Trade

41    With respect to the benefit received as a result of its contraventions of the Act, ASIC submitted that the benefit derived by Bit Trade by making the Product available to 1,163 customers without a TMD comprised fees and interest to a total of US$7,716,345. ASIC recognised that this figure was paid to the Payward group (rather than solely Bit Trade) but contended that this figure should be taken into account as the benefit gained as a result of the contravention, and that a penalty which did not exceed this amount would fail to perform its intended purpose.

42    Bit Trade submitted that the correct figure was US$1,350,074 which it arrived at after reducing US$7,716,345 to US$3,876,383 (the latter being the fees and interest attributable to fiat margin), deducting fees and interest payable by wholesale clients (US$1,891,192), and deducting fees and interest attributable to other clients likely to be “sophisticated investors” in the sense discussed in [36] above (US$635,117).

43    ASIC submitted that Bit Trade’s submissions as to the profit made by it and losses suffered by its clients were predicated on a counterfactual analysis that was inappropriate. In particular, it submitted that it was not appropriate to assess revenue attributable to the Product, or the losses suffered by its customers, on the basis of what these figures would have been if Bit Trade had acted differently by, for example, offering two separate products (i.e., fiat margin and non-fiat margin). In his oral submissions, Mr Giles SC, Senior Counsel for ASIC, emphasised that it is the issuing of the product as a whole, without a TMD, that is the relevant contravening act.

44    Bit Trade’s analysis is premised on a counterfactual that it would have made either a different product available (i.e. with no fiat margin) or that it would have made the Product available to customers who were not retail clients. Neither of those possibilities is explored in Mr Miller’s evidence. As at the date of the penalty hearing, Bit Trade had still not made a TMD for the Product even though Mr Miller said that Bit Trade began preparing such a TMD in around February 2024.

The nature and extent of the contraventions

45    It is accepted by Bit Trade that it made the Product available to 1,163 customers between 5 October 2021 and 11 August 2023, excluding any additional customers to whom the Product was made available after that date. The vast majority of those customers were most likely retail clients who the DDO regime is designed to protect. It follows that the penalty to be determined relates to a large number of contraventions committed over a lengthy period of time. The fact that many customers did not experience trading losses is not to the point. Bit Trade should not have made the Product available to them without first making a TMD.

Bit Trade’s disclosures to customers

46    Bit Trade made disclosures to customers regarding the Product which, it submitted, while not in the form of a TMD, served substantially the same purpose by identifying the risks of the Product and allowing customers to make an informed decision about whether to use it. In particular, throughout the period that it offered the Product, Bit Trade informed customers through its TOS that:

Engaging in any trade can be financially risky, and there can be higher financial risks if you engage in any margin transactions, use any other sophisticated trading options, or trade in digital assets that are subject to volatile market price movements. Please don’t use Kraken’s services if you do not understand these risks and enter into trades only when you understand the trading option you are using, the characteristics of the digital asset you intend to trade, and the potential financial risk of loss trading them entails.

(Emphasis original)

47    The TOS had a particular clause (cl 8) which dealt with the disclosure of risk. This clause (through subcl 8.1.5) drew attention to the specific disclosures about the risks involved in the Product that Bit Trade made through its “Margin Disclosure Statement”. This statement purported to explain the risks associated with using extensions of margin to make spot trades on the Kraken exchange. Bit Trade drew particular attention to the following statements:

Using margin to support spot transactions poses a high degree of financial risk and is not suitable for everyone. The use of leverage can work against you as well as for you and can lead to large losses as well as gains. You should examine your financial objectives, financial resources and risk tolerance to determine whether receiving extensions of margin secured by the assets in your Kraken Account is appropriate for you.

You can rapidly lose all of the funds you deposit for trading and may lose more funds than you deposit in your Kraken account. The prices of digital assets are highly volatile and a decline in the value of assets that are purchased or sold on margin may require you to provide additional funds to us, on short notice or with no notice, to avoid the automatic liquidation of assets in your account(s).

(Emphasis original)

48    Bit Trade submitted that the risks of the Product were prominently identified, and that customers were told the Product was not suitable for them if they did not understand these risks. It submitted that there was no reason to believe that customers would have made different decisions if similar (or identical) disclosures were made in the form of a TMD.

49    There are various difficulties with Bit Trade’s submission. Disclosure can be ineffective for a number of reasons, some of which are identified in para 1.2 of the Revised Explanatory Memorandum extracted at [4] above. Further, to advise retail clients that the Product is not suitable for them if they do not understand the risks is unlikely to be effective when there are no measures in place to determine whether they understand the risks. Bit Trade’s submission also ignores the existence of other important obligations with which Bit Trade would have been required to comply were it to have made a TMD as required: see, for example, ss 994C(2), 994C(4), 994E(1), 994F(1) and 994G of the Act. In the circumstances, Bit Trade’s disclosures were no substitute for a TMD and I give them very little weight in determining an appropriate penalty.

Bit Trade’s legal advice

50    Bit Trade placed considerable reliance on the Fold Advice. The Fold Advice was provided almost nine months after the DDO regime came into effect, and only after ASIC had written to Bit Trade raising with it the absence of a TMD for the Product which Fold had previously advised was a “credit facility”.

51    By the time Bit Trade came to file its defence in this proceeding, it was no longer relying on the reasons given in the Fold Advice to justify its decision not to make a TMD. It instead raised other arguments including that the Product was not a credit facility to which the DDO provisions applied. What legal advice was given to Bit Trade by the lawyers who acted for Bit Trade in this proceeding is not disclosed by the evidence.

52    Bit Trade made the Product available prior to obtaining the Fold Advice and continued doing so after it should have become apparent to Bit Trade that the Fold Advice was most likely incorrect at least in terms of its reasoning. In the circumstances, I give Bit Trade’s reliance on the Fold Advice limited weight in determining an appropriate penalty.

Complexity of DDO regime

53    Bit Trade submitted that the DDO regime is complex and untested, and that the liability judgment was the first decision to consider liability for noncompliance with s 994B. I accept that the DDO regime is complex. However, the fact that Bit Trade did not seek legal advice from lawyers experienced in the field before the DDO regime took effect does not sit comfortably with Bit Trade’s reliance on the complexity of the DDO regime.

54    Mr Miller’s evidence was that he did not give any consideration to whether the requirement to make a TMD applied to the Product around the time the DDO regime took effect. The inference I draw in the absence of evidence to the contrary is that Bit Trade did not turn its mind to the requirements of the DDO regime until these were first drawn to its attention by ASIC. Bit Trade accepted in its submissions that Ms Mayenco’s compliance assessment of February 2021 was deficient. In his evidence, Mr Miller attributed the failure to consider the application of the DDO regime to Bit Trade to an “oversight”. In my opinion, the failure to consider that matter points to a seriously deficient compliance system that is not explained by the complexity of the DDO regime. The complexity of the DDO regime is a matter to which I also give little weight.

Bit Trade’s compliance culture

55    Bit Trade submitted that it made genuine attempts to understand its legal obligations with respect to the Product. Bit Trade’s efforts to understand its legal obligations at or around the time the DDO regime came into force were inadequate. The fact that its efforts may have been “genuine” despite being inadequate is relevant, but not a matter to which I would give any significant weight in circumstances where it is not submitted by ASIC that Bit Trade’s contraventions were deliberate or wilful. The appropriate penalty should be determined on the basis that Bit Trade made no attempt to ascertain whether the Product would require a TMD upon the DDO regime coming into effect, and continued to make the Product available after it became apparent (or should have become apparent) that the analysis in the Fold Advice was most likely incorrect.

56    Bit Trade also submitted that it, and its parent company Payward, have made a number of changes to improve compliance with Australian regulatory obligations. These changes include:

(a)    Since December 2022, Bit Trade has engaged a dedicated Australian compliance officer with qualifications and experience in financial services, who reports to Mr Miller. The Australian compliance officer is supported by Payward’s global compliance team and global legal team.

(b)    In January 2024, Payward acquired an Australian Financial Services Licensee, and with it, the experience and expertise of the responsible managers on the licence who are now part of Bit Trade’s Australian operations team.

(c)    In August 2024, Payward engaged a full-time Australian lawyer to work within its regulatory legal function. That lawyer is based in Australia, and has experience working as a general counsel of an Australian cryptocurrency exchange and as a lawyer at a well-known Australian law firm.

(d)    In 2024, Bit Trade introduced a compliance manual which provides for regular review of Bit Trade’s compliance with Australian legislation by the compliance officer.

57    I give significant weight to the changes made by Bit Trade with a view to improving compliance. The changes appear to me to be substantial and reflect a genuine and more disciplined effort to properly assess and comply with legislation relevant to its operations.

Cooperation with ASIC

58    Bit Trade submitted that it cooperated with ASIC to a substantial degree during its investigation and in the preparation of the matter for hearing, including agreeing to the ASF.

59    Bit Trade submitted that the fact that it contested liability, and did not agree to ASIC’s proposed penalty was not a relevant consideration because “[a] company alleged to have contravened a civil penalty provision is entitled to defend itself without thereby attracting the risk of the imposition of a penalty more serious than would otherwise be imposed”: Australian Securities and Investments Commission v Web3 Ventures Pty Ltd (Penalty) [2024] FCA 578 at [76] per Jackman J citing Australian Securities and Investments Commission v Citrofresh International Ltd (No 3) (2010) 268 ALR 303 (“Citrofresh”) at [23]-[27] per Goldberg J.

60    In Citrofresh Goldberg J referred at [24]-[25] to what he described as long-standing authority in the field of criminal law which he considered also applicable to cases involving the imposition of civil penalties. The cases referred to by his Honour included Cameron v R (2002) 209 CLR 339 in which Gaudron, Gummow and Callinan JJ said at [12]:

Although a plea of guilty may be taken into account in mitigation, a convicted person may not be penalised for having insisted on his or her right to trial. The distinction between allowing a reduction for a plea of guilty and not penalising a convicted person for not pleading guilty is not without its subtleties, but it is, nonetheless, a real distinction…

(Footnotes omitted)

61    The fact that Bit Trade contested liability is not an aggravating factor. However, in circumstances where Bit Trade contested liability through to judgment, I do not consider that the matters relied on by Bit Trade as to its cooperation with ASIC should be given any significant weight in mitigation of penalty.

Deterrence

62    Bit Trade submitted that a penalty of $4 million is substantial and ample to achieve specific and general deterrence objectives. It submitted that this penalty:

(a)    would be almost three times Bit Trade’s profit in the financial year ended 2022 (its only profitable year in the period of the contraventions);

(b)    accounts for Bit Trade’s attempts at compliance, the difficult legal framework and Bit Trade’s improvements in its compliance culture;

(c)    is substantial in circumstances where there is no reliable evidence of any customer losses or any benefit to Bit Trade resulting from the contravening conduct;

(d)    is not oppressive; and

(e)    is so large that it cannot simply be regarded by Bit Trade, or any other cryptocurrency exchange offering fiat margin, as a cost of doing business without a TMD.

63    In support of its submission Bit Trade relied on the recent decision of Jackman J in Australian Securities and Investments Commission v American Express Australia Limited [2024] FCA 784 (“American Express”), in which his Honour imposed a pecuniary penalty of $8 million which had been agreed between the parties. Bit Trade emphasised that the defendant’s contravention of s 994C(4) of the Act in that case involved two courses of conduct each relating to a different financial product. The $4 million penalty proposed by Bit Trade was said to be commensurate with the penalty imposed in that case, which attributed $4.5 million to one course of conduct and $3.5 million to the other.

64    There are difficulties in drawing comparisons with American Express. First, unlike that case, Bit Trade failed to make any TMD. Secondly, the contraventions in that case occurred over a relatively short period of time (42 days) whereas the contraventions in the present case continued from October 2021 until late August 2024 (i.e. around 35 months). Thirdly, the defendant in American Express was found not to have made a significant profit from its contraventions. I do not consider that American Express is a useful comparator for the purpose of determining an appropriate penalty in this case.

65    I place little weight on Bit Trade’s profit for the 2022 financial year. While there is a draft income statement in evidence indicating that Bit Trade made a profit before tax of $1,371,000 in the 2022 financial year, the draft financial statements previously provided by Bit Trade to ASIC show a net loss for the same year of more than $3.3 million after allowing for what is described as a “transfer pricing recharge” of more than $4.28 million.

66    In his oral evidence, Mr Miller explained that the fees and charges for the Product were not directly accounted for in the Bit Trade accounts, but were instead reflected in the transfer pricing recharge, pursuant to an intercompany agreement. He explained that the transfer pricing mechanism was calculated with reference to “a whole suite of…revenues and expenses the group has” and that “the profits or losses are distributed accordingly across the group”.

67    Mr Miller said in his affidavit evidence that the draft financial statements have been updated since they were provided to ASIC. I note that the revisions to the profit/loss figure are largely explained by a substantial reduction in the transfer pricing recharge from around $4.28 million to around $1.06 million. The fact that the financial statements are all in draft and materially different, and that the profitability of Bit Trade appears to depend on undisclosed transfer pricing arrangements, raises serious doubt in my mind as to the reliability of Bit Trade’s evidence as to the profitability of its operations in the 2022 financial year.

68    Payward’s audited accounts for the financial year ending 31 December 2021 show that it had net income in the period of more than US$1 billion and net equity of around US$42 billion. It is apparent that the business of the group as a whole is highly profitable.

69    The fees and interest generated as a result of Bit Trade having made the Product available to its customers (the vast majority of whom were likely to be retail clients) exceed US$7.7 million. As I have explained, Bit Trade says that the relevant amount of fees and interest (see [42] above) is US$1,350,074, or approximately A$2,000,000, and that Bit Trade’s proposed penalty is twice that figure.

70    Bit Trade’s approach assumes that the difference between US$7.7 million and US$1.35million would still have been received by Bit Trade, had it not acted unlawfully. There is no evidentiary foundation for that assumption. However, I accept that the figure of US$7.7 million should not be seen as establishing a rigid floor or base from which a penalty in either that or some higher amount is fixed. Still, the revenue generated through Bit Trade’s distribution of the Product is a relevant matter and one to which I give significant weight.

DISPOSITION

71    It is not disputed by ASIC that it is appropriate to treat Bit Trade’s contraventions as forming part of a single course of conduct and I will fix a penalty on that basis. While I consider the penalty sought by ASIC to be excessive, the penalty proposed by Bit Trade is insufficient given the seriousness and duration of Bit Trade’s unlawful conduct. The Product was made available to customers without any consideration of the impact of the DDO regime until after ASIC intervened. After becoming aware that AISC considered that a TMD was required, it remained open to Bit Trade to make a TMD or to limit offerings of the Product to non-retail clients. Instead, it continued to offer the Product to retail clients when it knew or at least ought to have known that there was a not insignificant risk that it was acting in contravention of s 994B(2) of the Act. I am satisfied that Bit Trade’s contraventions were serious and motivated by a desire to maximise revenue.

72    I remind myself that it is necessary to fix a penalty that will deter Bit Trade and others from engaging in contraventions of a like kind and that will also discourage those to whom the DDO regime applies from regarding the pecuniary penalty imposed as an acceptable cost of doing business. While deterrence is the primary objective, it is also necessary to ensure that the penalty imposed is not so high as to be oppressive. In all the circumstances, I consider that a penalty of $8.0 million (approximately US$5.1 million) is appropriate.

73    There will be an order pursuant to s 1317G(1) of the Act that within 60 days Bit Trade pay to the Commonwealth a pecuniary penalty in the amount of $8.0 million in respect of Bit Trade’s contraventions of s 994B(2) of the Act the subject of the declaration made on 30 August 2024. There will also be an order requiring Bit Trade to pay ASIC’s costs of the proceeding.

74    Orders accordingly.

Associate:

Dated:    12 December 2024